By Patti Murphy
InsideMicrofinance.com
Recent developments in the mobile payments sphere illustrate why the bank-centric model for payments is seemingly immovable. I present this thesis gingerly, however, because consumers entering adulthood today are unlike any generation before.
Consumers born after 1990 have entirely different expectations about banking and shopping than do their elders. "They've been raised and live in a 24-hour electronic world," said George Warfel, Consulting Director at banking technology firm Fiserv Inc. "They see electronic payments as natural."
And there are plenty of nonbanks offering electronic payment options - companies like PayPal Inc., Google Inc., even Facebook Inc. - that have millions of loyal clients.
Nonbanks have lusted after the banking industry's payment franchise for a long time. And for good reason: it is a revenue engine, generating more than $282 billion in yearly revenues for banks, according to First Annapolis Consulting.
A recent nonbank mobile payment venture, ISIS, was heralded in late 2010 by AT&T, T-Mobile USA and Verizon Wireless. A press release proclaimed ISIS would lead the U.S. payments industry from cards to mobile payments while also delivering "new levels of competition and value to consumers and merchants."
Focused initially on brick-and-mortar payments, ISIS plans to use smart phones and near field communication (NFC) technologies. Barclays PLC's card unit, Barclaycard US, will be the issuer of these payment-enabled devices, and Discover Financial Services will handle clearing and settlement of payments.
The selection of Discover was noteworthy because the Discover brand was created 25 years ago during an attempt by Sears Roebuck and Co. to move into the bank-dominated payments space.
According to published reports, mobile carriers are now in talks with Visa Inc. and MasterCard Worldwide, the bank-centered card companies, suggesting the carriers, similarly to Sears, concluded it is a formidable task to create, build and sustain payment systems without banks.
"Banks have a natural advantage," Warfel said. That advantage stems in large part from the demand deposit account (DDA) relationship. As Warfel noted, "Any mobile payment has to be moved from [bank] account to [bank] account."
Banks are also adept at fraud management and at integrating payments with other services (like lending, investments and cash management). Also, people trust banks, even though bank-bashing seems in vogue. "Banks have a huge built-in trust advantage," Warfel said. A social scientist by training, Warfel has studied consumer attitudes extensively through surveys, focus groups and other customer-centric techniques. When asked to rank bank brands against other product brands, consumers always rank banks highest, he noted.
Results of a consumer survey conducted by Fiserv drive home this point. Nearly two-thirds (65 percent) of consumers polled want mobile payments offered by banks; 75 percent think it's important that mobile payments be deposited to DDAs.
Richard Crone of Crone Consulting LLC agrees banks have a natural advantage. "The question is, will merchants and banks move quickly enough to take advantage of their own self-branded [mobile] offerings?" Crone asked.
Long heralded as the next big shift in payments, mobile payments appear at long last to be on the cusp of something big, brought on by a convergence of factors, including the proliferation of smart phones, advances in NFC technologies and shifting consumer attitudes. Gwenn Bezard, Research Director at Aite Group LLC, sees huge potential for mobile POS payments: a growth from $1 billion in 2010 to $55 billion by 2015.
Stop by any Starbucks location and see for yourself. "The Starbucks mobile payment app [introduced in January] is the most successful launch of a new payment type in the industry," Crone said. He noted the chain rang up more than 1 million mobile transactions in just 30 days.
The app is available as a free download for select smart phones, including BlackBerrys and iPhones; it can be used at over 6,800 company stores as well as at Starbucks booths at more than 1,000 Target stores.
Starbucks Corp. claims more than a third of its U.S. customers use smart phones and that nearly three-quarters of those customers carry BlackBerry- or iPhone-branded devices. The mobile app rolled out in January builds on Starbucks' prepaid loyalty card program, which is believed to be among the most popular in the United States. The company estimates that one in five customers pays using a Starbucks card.
PayPal Inc. expects to process more than $2 billion in mobile payments this year, or nearly three times the total it processed last year. The company also has purchased Fig Card, a low-cost USB device that retailers can plug in to a POS device to support mobile payment acceptance. Executives at PayPal's parent company, eBay Inc., reported during a recent earnings call that they expect strong growth in mobile payments because, with the PayPal model, there's no need for consumers to enter credit card information, making it highly secure. Payment information is conveyed by sending a photo of a bill or text message to PayPal; authorization is by password.
The chief reason the PayPal model works is that it rides on the bank-controlled card network rails. Although Visa and MasterCard are no longer owned exclusively by banks, bankers continue to hold significant sway, both as board members and customers. And Visa, MasterCard and other card companies take security seriously; these days that means focusing more on mobile payments.
"We must move fast together to make sure mobile solutions are built with the level of security the industry needs, and not something that's just bolted on," said Ellen Richey, Visa's Chief Enterprise Risk Officer, in addressing the Visa 2011 Global Security Summit in Washington in April. That's why Visa developed and made public a set of best practices guidelines for merchants, software developers and device manufacturers that want to use mobile phones to facilitate card payments, Richey added.
Visa has also invested in Square Inc., which markets a miniature card-swipe device that plugs into smart phones, thereby allowing just about anyone with a Square device to accept card payments. Visa's backing should help dispel some of the criticism Square had encountered about being a potentially insecure method of payment. See "Square gaining momentum despite security concerns," The Green Sheet, March 28, 2011, issue 11:03:02.
Patti Murphy is Senior Editor of The Green Sheet and President of The Takoma Group. She is also the founder of InsideMicrofinance.com. Email her at patti@greensheet.com.
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